Following last week’s news that the price of a New York Stock Exchange seat had fallen to $1 million (a 63% drop from the peak price in 1999), this NY Times article examines the market forces that have caused the lackluster interest in the Exchange’s seats. As usual, the marketplace is the main reason, as it reacts to the NYSE’s increasingly obsolescent business model that has traditionally eschewed automation:

On an average day, the New York Stock Exchange trades 1.5 billion shares worth about $50 billion. Unlike almost all its competitors, it has traders on the floor who execute customer orders as well as their own orders in an effort to get the best price. Now the exchange has to decide how to maintain that identity while allowing more trades to be executed electronically.

The NYSE’s new business model is called the “hybrid market” model:

The . . . exchange’s ability to employ the automated market, called the hybrid market (humans in an auction, and computers matching orders) will determine whether the Big Board will keep attracting orders. If it fails, market share could fall.
. . . [T]he hybrid market will serve the exchange’s customers while maintaining the strengths of an auction market – namely the ability to get better prices rather than just deliver what appears on a computer screen. “The reason people come here is we have the best price 90 percent of the time and we have the best liquidity,” [said John Thain, the CEO of the NYSE]. “The more liquidity you have the better able you are to offer the best price, the more you have the best price, the more often the order flow comes to you. You cannot have one without the other.”

Nevertheless, the competition still expects the NYSE to continue losing market share, even under its new business model:

According to critics, more automation means that the New York Stock Exchange may lose its information advantage – the knowledge of what trades large players, such as mutual funds, are planning. Losing that knowledge could mean fewer orders. “There is a spiraling effect. As you lose the information, one customer takes his order off the floor, that translates to less information and less of an advantage,” said Chris Concannon, executive vice president at the Nasdaq exchange. He said he believed that the S.E.C.’s new rules and a hybrid model would erode the Big Board’s market share. “No single large electronic pool of liquidity will have more than 50 percent” of Big Board stock trading, he said.

And the NYSE’s changing nature better happen fast:

Critics and supporters agree that the New York Stock Exchange is not blessed with time. “The New York Central Railroad saw itself as a national icon and it was obliterated,” said Thomas Caldwell, chairman of Caldwell Asset Management and a buyer of four Big Board seats in the last year. “It ceased to exist. So many did. New York has to have a newer vision of itself and confidence in that vision.”

Now, I ask you, isn’t this a more effective and efficient way to change the NYSE than the method examined in this post and this post?